Friday, December 18, 2009

Late yesterday Adam put out two more technical analysis videos taking a look at the broader picture by examining the Dow Jones and the Nasdaq. Let's first start with his video on the Dow Jones Industrial Average. He uses two technical tools first by simply drawing a trendline from the highs in 2007 and you'll see on the chart that we are currently bumping right around that downtrend line which should serve as resistance. Things become even potentially more negative on a technical level when he lays out a fibonacci retracement and we see that we are also right around the 50% retracement, typically a very strong level in terms of resistance or support (and in this case, it's resistance).

Lastly, couple this with the fact that the market has been trading sideways in a box for the past month and you've got all the components for a large move coming. Adam thinks this consolidation will lead to a move lower in the markets. He points to the divergence in the MACD as cause for concern. The MACD has been downtrending for the past month or so while the market essentially trades sideways. Such a divergence does not typically signify good things to come. Either way though, just play the trading range we've established in the Dow Jones. If it breaks out above the 10,500 level then it's probably heading higher. However, if it breaks down below support around 10,285 then watch out below. And if we break lower, Adam has set 10,100 and even 10,000 as downside price targets. Click the chart below to see his technical analysis on the stock market.

Secondly, he also analyzes the Nasdaq in his other video. By drawing the fibonacci retracement tool again he says we're now in "thin air" in the Nasdaq as we float between the 50% retracement and the 61.8% retracement. He thinks that the longer the Nasdaq dawdles in this area, the weaker it gets. Adam highlights 2,059 as a very key level in the Nasdaq as it is the major support level from last month. If the Nasdaq breaks down below that level, then watch out below. Check out the rest of Adam's thoughts on the Nasdaq.

Previously this morning we laid out some macro thoughts and portfolio adjustments from hedge fund Woodbine Capital. Next we're examining their in-depth thoughts on gold from their October investor letter in an excerpt entitled, "Gold - The Anti-Goldilocks." Woodbine Capital is a global macro hedge fund firm founded in January by Josh Berkowitz and Marcel Kasumovich, two former executives at George Soros' hedge fund firm, Soros Fund Management. In his three years at Soros, Berkowitz returned an annual average of 34% net of fees. They are already closed to new investors as they started with $185 million and now have $2.5 billion in assets under management.

We wanted to present their thoughts on gold today because they offer an intricate and unique perspective on everyone's favorite precious metal. They have owned gold as well as deep out of the money puts on gold. However, they view this position not as a hedge against inflation or deflation, but rather as a part of their theme of stronger emerging market demand.

They argue that, "the fundamental source of strong prices is more likely to be tied to stronger demand from emerging markets, through higher income growth and stronger local exchange rates. We argue there are probably more powerful and much cheaper ways of representing that theme. Of course, another source of higher prices is that all investors wake up with the idea that a small part of their portfolios should be allocated to gold. That's true of any and all assets at any given time - it's called a bubble."

Woodbine then proceeds to examine the three ingredients to a bubble:

1. There is an initial reason for the rise in price. For gold: Weak US dollar, rising investment demand, and ncreased emerging market demand.

2. One-sided exuberance: when both good and bad news is 'good' for the asset and investors don't think the asset will decline. A great example is gold being supported by inflation and deflation cycles.

3. Market prices ignore downside risk. "Perception can be a reality."

So, by all means gold could be argued as a bubble. The hedge fund then goes on to examine gold in-depth by looking at supply and demand, the argument for hedging tail risk, and negative return skews. Instead of summarizing these points, we'll instead present you with the words direct from Woodbine. Embedded below is Woodbine's October investor letter with their commentary, "Gold - The Anti-Goldilocks." RSS & Email readers must come to the Market Folly site in order to read the full letter.

An intricate and well presented look at gold from the folks over at Woodbine Capital. This all comes in the midst of a media frenzy over the precious metal. After all, hedge fund icon John Paulson launched a gold fund and Eric Sprott is launching a physical gold trust. Not to mention, gold hit new highs and then drastically pulled back, causing even more of a frenzy.

All in all though, we've seen a great exchange as various hedge funds present cases both for and against the precious metal as they examine the rationale behind gold's value and its role in a portfolio. For more insight on this commodity, check out hedge fund Sprott's special report on gold, David Einhorn's rationale behind storing physical gold (hedge fund Greenlight Capital), as well as John Paulson's gold thesis. Ah gold... without you, what would we talk about?

Well known investor and 'corporate raider' Carl Icahn has filed a 13D with the SEC for his hedge fund Icahn Partners. In it, Icahn discloses a 11.28% ownership stake in Take-Two Interactive Software (TTWO). The filing was made due to activity on December 17th, 2009 and they now own 9,158,479 shares (including underlying call options).

Direct from the SEC filing, here is a breakdown of the prices at which Icahn bought shares and calls on TTWO through his various investment funds:

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The majority of their purchase was common stock, however they also purchased 783,479 shares through call options that expire December 16th, 2011 and they have sold European-style put options for the same amount of shares with the same expiry. This is not a new position for Icahn because as of September 30th (per his latest 13F filing), he owned 2,007,445 shares. This means that in the last three months, Icahn has purchased an additional 7,151,034 shares, a 356% increase over their previous stake.

Icahn has filed a 13D which signifies his activist intentions with his stake. And, given Icahn's rabblerousing ways, we'd expect nothing less. His filing claims that he feels shares are undervalued and that he might seek to talk with management. Many analysts believe that Icahn's entrance into such a name means that TTWO will most likely become an acquisition target again as it had previously been subject to advances from fellow gaming firms like Electronic Arts (ERTS).

Carl Icahn runs hedge fund Icahn Partners and focuses on activist investing where he seeks to implement change at various companies. We've covered his movements in-depth here on the blog and in October he laid out the idea to short real estate. In addition, we've also detailed some of his portfolio activity. For investing insight from Carl Icahn, check out his guest lecture at Yale.

Taken from Google Finance, Take Two Interactive is "a global publisher, developer and distributor of interactive entertainment software, hardware and accessories. The Company operates in two segments: publishing and distribution. The publishing segment consists of Rockstar Games, 2K Games, 2K Sports and 2K Play publishing labels. The Company develops, markets and publishes software titles for gaming and entertainment hardware platforms, including Sony’s PLAYSTATION3 (PS3) and PlayStation2 (PS2) computer entertainment systems; Sony’s PSP (PlayStationPortable) (PSP) system; Microsoft’s Xbox 360 (Xbox 360) video game and entertainment system; Nintendo’s Wii (Wii) and DS (DS) systems, and for the personal computers (PC) and Games for Windows. The Company’s distribution segment, which includes its Jack of All Games subsidiary, distributes its products, as well as software, hardware and accessories produced by others to retail outlets in North America."

Yesterday we got word that Paul Tudor Jones' main hedge fund BVI Global had stopped accepting new investments. From the market lows of this year to July, Tudor Investment Corp saw $1.3 billion in inflows and they've decided that they've reached an ideal capacity for now. While Tudor is a well known hedge fund with a storied past, we also want today to focus on another hedge fund that recently stopped accepting money as well.

Woodbine Capital is a hedge fund firm founded by two ex-Soros Fund Management players Josh Berkowitz and Marcel Kasumovich, as well as three other partners. George Soros' former executives launched their new fund in January with only $185 million and they already have $2.5 billion in assets under management. They have reached their initial target AUM and as such have stopped accepting new investments as of November 3rd. As of the end of October they were up 13.07% for the year. They employ a global macro strategy ala Soros Fund Management as they seek to play various trends by trading in all kinds of markets.

We recently got a glimpse as to what themes they will be watching going forward in their October letter to investors. Woodbine has made three main adjustments to their portfolio:

They then expand upon their #3 adjustment by saying that, "Regions that were early to exit from very accomodative monetary stimulus are priced for the gradual return to normal interest rates; the long workout in the US will encourage lower global real yields for a longer period and the risk premium in those markets is an opportunity."

Woodbine actually highlights a prudent point that while the global recession has just ended, we are possibly facing an early-cycle slowdown. They attribute this to the fact that the initial surge/recovery was driven largely by fiscal and monetary stimulus. But now that the supporting cast is slowly exiting stage right, inventories are starting to build again and everyone is focusing on demand. Woodbine anticipates that such an early cycle slowdown would put a damper on the potential rise in risk assets. In order to resolve the uncertainty they outline two scenarios:

1. "Global policy response encourages a rebalancing of demand away from the US"

or

2. "The world remains stubbornly tied to US demand, which grows at a very slow pace."

Their portfolio is reflective of such growth uncertainty given that their VaR (Value at Risk) is near the lowest levels since their inception. Overall, interesting thoughts from Berkowitz and Kasumovich's fund. Woodbine also laid out an in-depth look at the most talked about precious metal in a section entitled, Gold : The Anti-Goldilocks, which we've covered this morning in a separate post. For more updates from prominent hedge fund managers, head over to our hedge fund tracking series.

Thursday, December 17, 2009

The guys over at MarketClub just put out three interesting videos covering three hot topics: gold, the US dollar, and crude oil. Let's first start with their coverage of crude oil since it's trading near a crucial level.

Crude Oil

Firstly, Adam checks out the crude oil market and right off the bat he highlights that while crude has been in an overall uptrend since March of this year, the recent decline could be worrisome. He specifically notes the $67 level as crucial seeing how that was the most recent level of major support back in late September. While crude initially traded higher from thos levels, it has since spiraled down and is getting close to testing support. If it takes out $67 to the downside, Adam notes that you should exit the market as support will have broken. You should also note that Adam previously identified a pattern in crude oil where it is sold off every 75 days or so and then was bought right back up again. We're in the midst of one of those downtrend areas right now and buying needs to come in for this pattern to remain in tact. If crude heads lower, it will have breached a support level and nullified this patterned uptrend as well, a definite sign to exit the commodity. Click the chart below to watch the crude oil analysis.

Gold

Secondly, you can see their technical analysis on gold here. Adam feels that it's best for you to just stay out of the precious metal for now if you're not already in it because of what he calls "silly season." He's referring to the period from December 15th until the new year where many traders and money managers simply take off for the holidays. As such, volume in markets decreases and it only takes a little bit of money to really whipsaw things around. Not to mention, they are seeing conflicting indicators on their screen as the weekly trend is going down but their daily indicators are pointing up. These divergences combined with the lack of market participants over the holidays means it's best to sit on your hands they say.

US dollar

Lastly, you can see their analysis of the US dollar here. The dollar has been in a definitive downtrend over the past few months and their monthly indicators have been bearish since May of this year. Their weekly signals on the other hand, have turned up as the dollar has been rallying as of late. While some may interpret this as bullish, they note that trading against the primary trend (which is still down) is not advisable. We'd tend to disagree with him on this point as illustrated in the chart below you can see that the dollar has clearly broken out of its downtrend (green line) from the past few months. Not to mention, it is now trading above its 50 day moving average (blue line) and both the RSI and MACD are heading higher.

To his credit, Adam highlights the potential divergence in the MACD as its been slowly building higher since June. This means that the dollar is definitely something to keep an eye on in his view, but until the primary trend reverses, he thinks it's best to sit on the sidelines. We're obviously starting to see a common theme here in staying on the sidelines. It's typically not worth the risk of playing around in the anemic holiday markets. Conflicting signals and lack of true trading participants going into the holidays means you should probably avoid getting whipsawed around. Overall, Adam took at a look at some hotly traded assets but conceded that maybe it's best to just not trade them at all until the new year and we can't argue there.

This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.

Next up is Lee Ainslie's hedge fund firm Maverick Capital. Ainslie learned his ways under the guidance of hedge fund legend Julian Robertson and is a member of the Tiger Cub family. (You can view a Tiger Cub family tree here). As such, Maverick is a part of the Tiger Cub portfolio clone created with Alphaclone that is seeing great returns and is comprised of holdings widely held by all of the Tiger Cub hedge funds.

Maverick manages well over $8 billion and focuses on straight up stock picking on both sides of the book (long and short) but they do not employ pairs trades. They have six industry heads and each team handles their respective sector. Risk management is a big focus at Maverick and position sizes typically don't go above 5-8% of the portfolio. They focus on value and growth at a reasonable price (GARP) investments and they like to compare enterprise value to sustainable free cash flow. To learn more about this hedge fund, check out our profile/biography on Lee Ainslie & Maverick.

Keep in mind that the positions listed below were Maverick's long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise denoted.

Some Reduced PositionsStakes they sold shares in but still own:Gap (GPS): Reduced position by 46.7%Lorillard (LO): Reduced by 44.9%PepsiCo (PEP): Reduced by 35.8%Lender Processing (LPS): Reduced by 26%Palm (PALM): Reduced by 22.3%America Movil (AMX): Reduced by 18.9%Davita (DVA): Reduced by 18.8%Apache (APA): Reduced by 18.7%Covidien (COV): Reduced by 9.9%

Maverick added to technology names the most on a quarter over quarter basis. Four of their top 10 holdings were brand new positions just added. Half of those were technology names (Qualcomm & Corning) and they were Maverick's third and fourth largest holdings respectively. Not to mention, Maverick's top two holdings were also tech plays in Apple and Hewlett Packard. Do you see a theme here?

Lee Ainslie's hedge fund also added largely to shares of Priceline, Apollo Group, and JP Morgan Chase. This is intriguing mainly because other 'Tiger Cub' hedge funds were buying the exact same names (see Andreas Halvorsen's Viking Global which we just covered this morning). A few other names Ainslie added to that are more unique to their portfolio include Gilead Sciences as well as First Solar, a name that they tripled their exposure in.

We also want to focus on their new portfolio addition in CVS Caremark. Way back in the first quarter of this year, Maverick sold out of CVS in favor of competitor Walgreens. Now, fast forward to the third quarter of this year and we see that Maverick has done the opposite and has sold completely out of Walgreens and started a new stake in CVS Caremark again. Possibly the most interesting aspect of this whole 'switcheroo' is that Lee Ainslie was at an investing conference in late October at the University of Virginia and he mentioned one of his current favorite plays was CVS. He obviously just added this name in the third quarter and then a few days after the conference on November 5th we saw shares of CVS drop from $36 to $28 and wondered if Ainslie was buying or not. Shares are now trading around the $30 mark. We'll definitely be interested to see what Ainslie did with this position when the fourth quarter portfolio disclosures are released given that he has been flip-flopping on various pharmacy plays throughout the year.

Below are some graphical illustrations of the changes made to Maverick Capital's portfolio courtesy of Drew Robertson at Financial Research Station:

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And also:

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Assets from the collective holdings reported to the SEC via 13F filing were $8.3 billion this quarter compared to $6.4 billion last quarter, so they deployed almost $2 billion into long US equities on a quarter over quarter basis. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Also, please again note that these positions were as of September 30th so two months have elapsed and they've undoubtedly shifted around their portfolio since then.

After a brief hiatus we're back with our coverage of Q3 portfolios and today we'll cover Andreas Halvorsen's Viking Global. Halvorsen is a 'Tiger Cub,' or a progeny of legendary investor and hedge fund manager Julian Robertson of Tiger Management. (See the Tiger Cub 'family tree'). Halvorsen has taken what he learned/used at Tiger and added his own spice to the value oriented, yet growth at a reasonable price (G.A.R.P.) tolerable investment style. Viking employs a fundamental strategy, using a bottom-up process to pick stocks.

Halvorsen attended Williams College and received his MBA from Stanford and he has previously worked at Morgan Stanley and Tiger. In Alpha's 2008 hedge fund rankings, Viking was ranked #70 in the world. In terms of updates this year, we had covered Viking's investor letter from the second quarter where they were lagging the markets due to their short positions.

Keep in mind that the positions listed below were Viking's long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise denoted.

Some Increased PositionsPositions they already owned but added shares to:Ralcorp (RAH): Increased position by 7,208%, but overall less than 0.5% of their reported holdingsCSX (CSX): Increased position by 515.7%Owens and Minor (OMI): Increased by 418%, but overall still under 1% of their long portfolioGoodrich (GR): Increased by 254%Apollo Group (APOL): Increased by 141.8%XTO Energy (XTO): Increased by 119.5%Franklin Resources (BEN): Increased by 114.2%Visa (V): Increased by 92.5%Sherwin Williams (SHW): Increased by 85.6%, but still only a small portion of their portfolioVirgin Media (VMED): Increased by 56.7%Davita (DVA): Increased by 49.6%Tyco (TYC): Increased by 38.1%CVS Caremark (CVS): Increased by 22.3%JPMorgan Chase (JPM): Increased by 20.1%

One of Viking Global's biggest purchases was a brand new stake in Express Scripts (ESRX) which they brought up to their 5th largest holding. What's interesting here is that Viking was adding in size to multiple names as they were undoubtedly helping the market rally fuel higher in the third quarter. Their most bountiful buys were in Visa, Franklin Resources, Apollo Group, CSX, and Goodrich Corporation, names that are all in their top 10 largest holdings. Their large purchase of CSX was of particular interest given that Warren Buffett's Berkshire Hathaway recently purchased all of fellow railroad Burlington Northern (BNI). Not to mention, the railroads (and CSX in particular) have been ripe with hedge funds as major shareholders previously.

Some notable names they sold completely out of in the third quarter include Cognizant Tech (CTSH), Career Education (CECO), and Thermo Fisher Scientific (TMO). They also sold off shares in the following names but they retained a position: They unloaded some Qualcomm which is notable because it was recently listed as one of the top 10 most popular stocks amongst hedge funds. Additionally, we note their Priceline sale because shares have been ramping higher over the past few months so we could assume they are locking in some profits.

Below are some graphical illustrations of the changes made to Viking Global's portfolio courtesy of Drew Robertson at Financial Research Station:

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And also:

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Overall, they were reducing their technology holdings on a quarter over quarter basis. They boosted their exposure to the services sector and kept financials exposure steady. Assets from the collective holdings reported to the SEC via 13F filing were $7.8 billion this quarter compared to $5.7 billion last quarter, so they put a meaningful amount of capital to work on the long side in US equities. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Also, again please note that these positions are as of September 30th so two months have elapsed since this disclosure and they've undoubtedly shifted around their portfolio since then.

Wednesday, December 16, 2009

Philip Falcone's hedge fund Harbinger Capital Partners has filed two form 4's and an amended 13D with the SEC recently to detail changes to their position in Calpine (CPN). Simply put, they've sold a lot of shares and below you'll find screenshots of the transactions taken directly from the SEC filings:

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Additionally:

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After all was said and done, it appears that Falcone's hedge fund still owns over 14 million shares of CPN. We also want to highlight the purpose of the transaction as identified on their amended 13D filing. According to the amendment, "On December 8, 2009 and December 9, 2009, Kelson Investments, S.ar.l., an indirect wholly owned subsidiary of the Master Fund and Special Fund ("Kelson Sarl"), sold 8.4 million and 882,248 shares, respectively. The proceeds of these sales will be used to pay off a loan made to Kelson Canada, Inc., an affiliate of Kelson Sarl and wholly owned subsidiary of the Master Fund and Special Fund. These shares were pledged as collateral for the Loan."

These sales come after Harbinger has recently sold Calpine shares (CPN), and executed an offering back in September. In terms of additional portfolio activity, Harbinger has been quite busy making SEC filings as of late and they recently adjusted two positions as well. Philip Falcone runs his $6 billion hedge fund with a focus both on distressed and equity plays and often takes concentrated positions in companies. For even more of their recent position adjustments, we previously penned a post detailing a portfolio update too.

Taken from Google Finance, Calpine is "an independent wholesale power generation company engaged in the ownership and operation of natural gas-fired and geothermal power plants in North America. The Company sells wholesale power, steam, capacity, renewable energy credits and ancillary services to its customers, including industrial companies, retail power providers, utilities, municipalities, independent electric system operators, marketers and others. The Company’s portfolio comprises two types of power generation technologies: natural gas-fired combustion turbines (primarily combined-cycle) and renewable geothermal conventional steam turbines."

Fresh off the presses, Seth Klarman's hedge fund Baupost Group will be purchasing additional shares in Facet Biotech Corporation (FACT). Facet has announced that they've agreed to amend their Rights Agreement to let the purchase go through. Baupost owned 3,506,875 shares as of December 16th, a 14% stake in the company. The new provisions will allow Baupost to increase their stake to 15-20% of the company.

However, there is a catch. Baupost must vote any shares in excess of a 15% stake in conjunction with the majority shareholders vote or with the recommendations of Facet's board. This becomes interesting because as many of you already know, Biogen Idec (BIIB) is trying to close its all cash tender offer of $17.50 per share for Facet. And the drama heightens when we see that Baupost has told Facet that they have no intentions of tendering their shares into Biogen's offer. Things are starting to get interesting as Facet currently trades around $16.45, well below Biogen's $17.50 offer price. With these recent developments, it looks like this process has been drawn out further. Head over to Tickerspy to view Baupost Group's portfolio to see what else they're investing in.

In terms of other recent activity, Klarman was recently selling more Syneron Medical (ELOS). Additionally, in November we saw in November they started a new stake in Enzon Pharmaceuticals. Klarman received his MBA from Harvard and then went on to work for Baupost at age 25. Nowadays, it's his show to run. Baupost is one of the select few funds we have included in our Market Folly custom portfolio that is seeing over 26% annualized returns by combining 3 hedge fund portfolios into a cohesive whole. (Head over to Alphaclone to see the hedge fund portfolio replication in action).

Taken from Google Finance, "Facet Biotech is a biotechnology company. The Company is engaged in identifying and developing oncology therapeutics. It has four antibodies in the clinic for oncology and immunologic disease indications, of which two are in phase II and two in phase I. The Company has several investigational compounds in various stages of development for the treatment of cancer and immunologic diseases, three of which it is developing with collaboration partners: two with Biogen Idec and one with BMS."

Tuesday, December 15, 2009

Jim Chanos, the noted short-seller and manager of hedge fund Kynikos Associates was recently interviewed and provided some insight as to what he is shorting. And, we see that he has taken aim at automakers as he is short the manufacturers and said he would not want to be long Ford or Fiat. While it seems he is talking about the equity here, we found this interesting as many hedge funds have been long the debt side of the automotive industry as bonds in GMAC, Ford Motor Credit Corp, and Ford had previously been scooped up by prominent hedge funds.

Interestingly enough, Chanos is also betting against China and is doing so by betting against copper, iron ore, and various other commodities used in China's expansion. Take note though, that he does not include gold in this list of commodities to short since people typically don't create buildings out of gold. He says that he is just now putting on these shorts and he may be early but he sees many opportunities there.

This recent insight comes after we also covered an in-depth interview with Chanos. If you're unfamiliar with him, Chanos graduated from Yale and is well known for his short selling prowess where he puts a large focus on identifying fundamental flaws in valuation due to underestimated or unearthed problems within a given company. He founded Kynikos which is Greek for "cynic" and is most known for uncovering the issues at Enron.

Here is the full video interview from CNBC (Email readers will need to come to the site to watch it):

A handful of readers have requested coverage of Everest Capital, a Miami and Singapore-based firm run by Marko Dimitrijevic. We will make an effort to post what we can find on the firm in the coming weeks. For starters, Everest was founded in 1990 and currently manages $1.9 billion, spread across five individual strategies. The firm is best-known for its devotion to studying global macro and emerging markets trends, and then applying a heavy dose of fundamental, bottom-up research to identify opportunities. Of note, the firm prefers to invest across multiple asset classes, diversifying across not only debt and equity securities, but also commodities and currencies.

Earlier this month, the firm released its latest white paper, “The End of Emerging Markets?” In essence, the paper highlights the rapidly leveling playing field between emerging and developed market economies. Pointing to recent improvements in liquidity, corporate governance, volatility, and overall size, the paper makes the case that investors too easily resort to age-old excuses to limit allocations to emerging markets. By making such assumptions, investors could be penalizing themselves, missing out as more and more emerging economies position themselves as legitimate global economic players.

In addition, Everest's CIO, Dimitrijevic, was featured in a November 2 interview in Barron's. In the piece, he touches upon many of the ideas outlined in Everest's latest white paper. Most notably, he presents a compelling case as to why he believes nominal GDP is a misleading measure of economic production. By using U.S. Dollars as a measuring stick, he feels that countries' economic outputs are being over- and underrepresented on the global scale, too-easily distorted by differences in exchange rates and income levels. As a solution, he proposes that GDP be measured according to purchasing power parity, whereby one dollar basically purchases the same bundle of goods and services in all countries. According to Everest's research, such a measurement would show that emerging market economies are responsible for a much larger share of global economic output; in fact, they produce a nearly-equal amount of global economic output as their developed market counterparts. For more on Everest Capital, visit their website.

In the future, we're going to be building out quick profile/biography pieces on various hedge funds and their managers in order to provide reference points going forward. In the mean time, here are some of our past in-depth profiles:

Over the course of this year we've shared various presentations on the potential bullish prospects for mall REIT General Growth Properties (GGWPQ) courtesy of Bill Ackman's hedge fund Pershing Square Capital Management. These have included a recent outlook on the mall REIT industry, an update on their holding via Pershing Square's investor letter, as well as their previous presentation on General Growth. As one of the largest shareholders, Pershing Square has been at the forefront leading the charge. Today, we want to flip the tables and present the short case for General Growth Properties, courtesy of Hovde Capital Advisors.

Hovde Capital Advisors LLC is an investment manager that runs various hedge funds. They employ a "sector-specific, deep-value, long/short strategy" and utilize a combination of both top-down and bottom-up in their approach. Back in March of this year we actually covered President and CEO Eric Hovde's thoughts on the market as he thought we were in a depression and that commercial real estate defaults would hit as high as 25%.

There are always two sides to a trade and this is the perfect example. Hovde Capital prudently points out that many investors have been using Pershing Square's original GGWPQ presentation as a means for valuing General Growth Properties... a presentation that is now well outdated. In their analysis below, they update and expand upon Pershing's original model in order to provide a more current look at the situation from a bottom-up level.

They first examine the macro environment just as Pershing Square did in their recent Mall REIT presentation. While Pershing's highlights potential improvement, Hovde takes the other side and highlights how we are by no means out of the woods yet, citing a drop in consumer spending, a decrease in available consumer credit, and non-bullish trends for mall REITs in particular. Focusing next specifically on General Growth, Hovde believes that that a 7.5% capitalization rate is a far too optimistic assumption given that recent comparables have been higher than 8%. Additionally, they highlight that GGWPQ's cashflow is now more than 20% below the levels in 2008. While the fact that General Growth is extremely leveraged is well known, Hovde points out that rival Simon Property Group (SPG) has debt to EBITDA of 6x while GGWPQ is "in excess of 16x and would still be in excess of 12x even if all of the unsecured debt was converted to equity."

Potentially the most alarming to the bulls though is Hovde's focus on net operating income (NOI) sensitivity. They write, "applying Q3 annualized NOI to the Pershing Square valuation analysis, the implied equity value per share of the company today is NEGATIVE $5.03 at an 8.5% cap rate and +$5.73 at a 7.5% cap rate." Needless to say, they are decidedly bearish on GGWPQ. Going forward, one of the focal points in this whole scenario will be cap rates. Hovde feels an 8% cap rate is unrealistic given the reality of the economic situation and they argue that a cap rate of 8.5% or higher would be more appropriate.

Hovde are short shares of GGWPQ and think that equity investors will instead be disappointed upon GGWPQ's reorganization. Embedded below is the short case for General Growth entitled "Fool's Gold" in its entirety:

You can download the .pdf here. So there you have it: "Fool's Gold," the bearish argument for General Growth Properties (GGWPQ). We thought it would be interesting to examine both sides of the trade as we'd previously examined the long case for GGWPQ and then today we shared the short case with you. We'll continue to watch this intriguing situation unfold as hedge funds wager on the impending outcome. As always, don't shoot the messenger.

Since circulation of this presentation, Todd over at ValuePlays.net has penned a rebuttal to Hovde's presentation. Ironically, Hovde claims many are using outdated numbers from Pershing's presentation and Todd points out that Hovde themselves are also using outdated numbers. Interesting stuff. Secondly, hedge fund manager Whitney Tilson of T2 Partners has also penned a rebuttal as it seems Hovde has been called out on their conclusions. The battle of bulls versus bears continues on...

In a 13G filed with the SEC, Thomas Steyer's hedge fund firm Farallon Capital has updated their holdings in Beacon Roofing Supply (BECN). Due to activity on December 3rd, Farallon now has a 5.6% ownership stake in with 2,525,422 shares. This is an increase as per their last 13F filing they owned 945,000 shares as of September 30th, 2009. Over the the last two and a half months, Farallon has added 1,580,422 shares, a 167% increase.

For more recent activity out of Farallon head to our post on their portfolio and internal firm adjustments. Thomas Steyer founded Farallon in 1986 and today it is a multi-billion dollar hedge fund that typically invests in equities, private investments, debt, and real estate. They are one of the 40+ prominent hedge funds we keep an eye on in our portfolio tracking series so head over there to see what other hedgies have been up to.

Taken from Google Finance, Beacon Roofing Supply is "a distributor of residential and non-residential roofing materials in the United States and Canada. The Company also distributes other complementary building materials, including siding, windows, specialty lumber products and waterproofing systems for residential and nonresidential building exteriors. As of September 30, 2009, Beacon Roofing Supply, Inc. operated 172 branches in 37 states and three Canadian provinces, carrying up to 10,000 stock keeping unit (SKUs) and serving more than 40,000 customers."

Last week Raymond James' chief investment strategist Jeff Saut was out saying that there was more market upside. Two weeks ago, he was commenting on how a weak dollar trend could fuel further gains in equities. This week, his investment strategy shifts to a missive about the economy in general.

He focuses on the fact that while the economy still has work to do, it is positive that both labor and capital are moving "from dying industries like the building of McMansions, and gas guzzlers, to growth industries like biotech, infrastructure, environmental, green, clean energy, etc." This replacement sequence helps the economy to recover and start fresh. He also highlights a mutual fund out solely targeting investments in a new 'energy revolution' that will take place over the next 15-20 years. It seems that his main point is that this process will take time, but the long-term horizon looks promising as America (and the world) look to re-invent.

Turning back to stock market specifics, Saut highlights the 1085 level on the S&P 500 that has been tested (and held) four separate times. He notes that this successful technical victory combined with 'performance anxiety' by money managers heading into year-end will make the market head above the 1115 level.

Jeff Saut's weekly investment strategy 'By Popular Demand' is available in its entirety below:

Monday, December 14, 2009

It was only a matter of time. Sprott Asset Management has jumped in the recent gold fund pool by filing a preliminary prospectus in the US. While hedge fund Paulson & Co's new gold fund is aimed at betting on gold related investments, Sprott's offering is a little different. Eric Sprott's firm is aiming to launch a $575 million gold bullion fund that will store physical gold and offer investors easy exposure to the metal. This could easily serve as a competitor to the SPDR Gold Trust (GLD) that is currently a popular way for investors to get exposure to the precious metal. This really should come as no surprise given that Sprott had previously penned a piece entitled Gold: The Ultimate Triple-A Asset. Not to mention, their portfolio is littered with metals and mining plays.

If their new product is approved, it will be traded on the New York Stock Exchange (NYSE) under the ticker PHYS and on the Toronto Stock Exchange (TSX) under the ticker PHY. The initial public offering price is to be set at $10 per unit. Sprott's physical gold trust is expected to hold 97% of assets in physical gold bullion in London Good Delivery bar form and will not invest in certificates or other instruments. This fund's goal is to be a play purely on physical gold. Their gold will be stored at the Royal Canadian Mint and unitholders will be able to redeem their units for physical gold bullion on a monthly basis if they so desire. Additionally, as of right now they will not make regular cash distributions to the unitholders.

In summary, it looks like $4.4 billion Sprott Asset Management has entered into the gold fund game as a direct competitor to the SPDR Gold Trust (GLD). While Sprott is targeting a $575 million fund launch, they will have a long way to go to catch up to exchange traded fund GLD as it currently sports a market cap of $40.5 billion. We'll have to see if their offering takes off as Sprott is a relatively household name in the asset management business. For more thoughts from Sprott on the topic of gold, check out their special report on the precious metal.

Despite pulling back sharply over recent days, gold has seen an investment surge over the past year. Check out this video on gold to see logical pullback areas, price targets for gold's move, as well as where to place your stops. Do the launches of John Paulson's gold fund and now Sprott's Physical Gold Trust mark a top in the gold market? We'll have to wait and see.

Eric Mindich’s hedge fund Eton Park Capital has recently extended its holdings in the UK market. When we last checked in on their US equities activity, we saw that they had established a large Verisk Analytics position (VRSK) upon its IPO. We now see that they've been active in UK markets and wanted to update their recent maneuvers. Before proceeding you may want to check out our primer on tracking UK positions. Additionally, you can view other hedge funds' UK positions here.

Eton Park was amongst the first hedge funds to build a stake in Cadbury ahead of the announcement by Kraft that it was interested in buying the company. See also our coverage of Paulson & Co's stake in Cadbury.

symbol

date

shares

%

Cadbury

CBY

24/09/2009

28570576

2.09

10/12/2009

38815867

2.83

Under Rule 8.3 of the UK Takeover Code, if a fund holds 1% or more of the stock of the offeror or the offeree in a takeover, all dealings (including derivatives) must be disclosed on the day following the date of the transaction. This requirement then continues throughout the offer period. A disclosure table giving details of the companies involved in takeovers in the UK is available on the Takeover Panel's website. Eton Park’s position in Cadbury is made up of 0.37% ordinary shares and 2.43% derivatives (probably equity swaps if we were to venture a guess).

Burford Capital

BUR

21/10/2009

7920000

9.9

Eton Park has also recently taken a stake in the new issue Burford Capital. Burford is involved in the legal sector and aims to create and manage a diversified portfolio of commercial dispute financing investments with the aim of providing shareholders with attractive levels of dividends and capital growth. In the short term, the Company intends to focus on commercial disputes in the United States and on international arbitration matters.

Eton Park’s Daisy Group investment is made up of 4.8% ordinary shares and 4.8% equity swaps. Tosca Fund run by Tiger Cub Martin Hughes also holds an 11.28% stake in Daisy Group. Daisy Group PLC, is a newly combined business of Daisy Communications, Freedom4 PLC and Vialtus Solutions. It is a provider of integrated voice and data services to the small-medium business market. Customers have access to a combined product set including access, hosting, voice, managed services and mobile telephony from a single customer service and billing platform. The group operates from its business centres in London and Lancashire.

If you're unfamiliar with Eton Park then here's what you need to know. Eric Mindich started his hedge fund back in 2004 with $3 billion under management with a $5 million minimum investment. Nowadays, Eton Park manages over $6 billion. Their investment strategy centers around Mindich's time at Goldman Sachs where he focused on merger arbitrage. He was quite successful and became the youngest partner in Goldman Sachs' history at the age of 27. In addition to merger arbitrage, Eton Park focuses on long/short equity strategies and even invests up to 30% of their portfolio into private investments. Eton Park's solid track record has landed them in our Market Folly custom portfolio. We created this equity portfolio with Alphaclone and it is seeing over 25% annualized returns since 2000.

That wraps up this update on Eric Mindich's hedge fund Eton Park Capital and their recent UK portfolio additions. For more on Eton Park, check out some more of their portfolio. Lastly, head over to our posts on UK positions to see what other hedge funds are investing in as well.

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